Some lease questions ...

[ttweed]

$3042 is not an apples-to-apples comparison because you have ignored the time value of money. You need to pick a discount rate. E.g. if your short term savings are earning 2% and will cover the entire purchase cost, use 2%. Or if you would borrow the funds to buy at 3%, use 3%. Then you can convert the future payment schedule of leasing into an equivalent total upfront payment and compare that to the total upfront payment of purchasing.

Wayne,
Thanks for taking the time to reply and make those calculations, but I'm afraid I don't understand them completely. Can you elaborate? Wouldn't such a discount for the "time value of money" on the lease only apply if I was proposing paying cash for the car? This discount represents the lost opportunity cost of using cash to buy the car instead of investing it, right? Or is there some other subtlety here I am missing? My example proposed financing the purchase at a lower rate than Nissan's lease financing, not using my cash assets to pay for the car.

As you yourself admitted, the purchase is way front-loaded...

I did ignore the front-loading of the 24-month term on the loan vs. the 36-month lease financing, as well as the time value of waiting for the $7500 tax credit for a year, but I thought that would pretty much be balanced out by the financing costs when buying out the lease residual, as I stated in my post.

You wouldn't happen to have a 7% house mortgage you could pay down, would you?

No, the house was paid off 5 years ago.

TT

 

[wwhitney]

Thanks for taking the time to reply and make those calculations, but I'm afraid I don't understand them completely. Can you elaborate? Wouldn't such a discount for the "time value of money" on the lease only apply if I was proposing paying cash for the car? This discount represents the lost opportunity cost of using cash to buy the car instead of investing it, right? Or is there some other subtlety here I am missing? My example proposed financing the purchase at a lower rate than Nissan's lease financing, not using my cash assets to pay for the car.

Ah, I missed that your example included $764 in interest for the purchase side. If you are going to finance at 2% on the buy side, then instead of including the interest cost on the buy side, you should just use a 2% discount rate. My 2% discount rate calculation based on your numbers was a $1,400 lease premium, but I was off by the $764 you had included in interest, so it is a $2,150 lease premium. Still less that your initial number of $3,050, but the difference is less dramatic.

Sorry about that. If you'd still like me to elaborate more, let me know.

BTW, the $2,150 number we have now is a slight overestimate. It doesn't account for the fact that on the buy side you are financing over only 2 years instead of 3 years.

I did ignore the front-loading of the 24-month term on the loan vs. the 36-month lease financing, as well as the time value of waiting for the $7500 tax credit for a year, but I thought that would pretty much be balanced out by the financing costs when buying out the lease residual, as I stated in my post.

The financing costs on the residual can be ignored if you can finance it at your discount rate. Also, in your buy scenario you are paying off the whole thing in 2 years, so in the lease scenario there is no reason to finance the residual, you should be able to just pay it off when it is due.

Cheers, Wayne

 

[ttweed]

Sorry about that. If you'd still like me to elaborate more, let me know.

Thanks again, Wayne. I think I understand now, I was just afraid there was some concept about leasing that I didn't understand yet, since I have never done it. I have read through every leasing thread on this forum trying to figure out what to do, and for my particular situation, where I am likely to keep the car for a long time, it boils down to what evnow says in the original "comprehensive lease/buy thread--"The key takeaway is that lease vs buy comes down to
- Extra fees you pay for leasing (Acquisition of 595 and disposition of 350)
- Difference between the 4.9% offered by Nissan and the interest rate offered by your lender."

Of course, there are the extra wildcards of the tax credit and the question about the residual value, considering the risks of a Gen1 product. I can easily manipulate my income tax level for this year by converting IRA funds to Roth IRA and get the full credit, so that isn't an issue for me. The residual value has been set now by financial folks who have a lot more experience in these issues than I do, and chances are they won't be far off, or Nissan will take a bath on the lease deals. I have some empathy for evnow's question of "will Leaf market value follow normal car prices or more like a V1 electronic product (HDTVs!). If it is like other cars, in 3 years the market value will be similar to residual. If like an electronic product, definitely lower." I actually believe that the comparison to modern electronic appliances isn't quite applicable. The development, manufacturing and use cycles for EVs is much longer than for the more disposable electronic devices that we have seen become cheaper (and even obsolete) so rapidly over the last few decades. Also, my wife and I do not tend to "upgrade" to the newest "gadgets" frequently, and the Leaf is likely to meet our needs even if the range should degrade to 50-60 miles in a few years, since it is not our only car. These are the thoughts that are driving me to the "buy" side of the question.

BTW, the $2,150 number we have now is a slight overestimate. It doesn't account for the fact that on the buy side you are financing over only 2 years instead of 3 years.

True dat, and with planet4ever's excellent replies, I have been able to quantify that now:

First year costs
Lease: $6,886.53 [includes 12 payments, the first as part of the $2K]
Purchase: $19,132.39 [includes 11 payments]

Second year costs
Lease: $5,342.76
Purchase: $11,189.88 [after deducting $7500]

Third year costs
Lease: $5,342.76
Purchase: $1,557.49 [final payment on loan]

Using a 2% discount (or lost opportunity cost on my money), I can calculate the following now:
First year-- I lose 2% of $12,245 front-loaded payments, or $245
2nd year-- I lose 2% of $5847 on front-loaded payments, or $117
3rd year-- I actually gain $76, since the lease payments are greater than the loan payments in the 3rd year.
So the net difference up to the end of the lease period is $286, taking into account the time value of money. I would actually need to add the time value of waiting for the $7500 credit, as you mentioned previously, but since I can reduce my withholding to start receiving this benefit monthly, that actually amounts to $82 (not $150), so let's say $368 total for these costs I previously ignored.

The financing costs on the residual can be ignored if you can finance it at your discount rate. Also, in your buy scenario you are paying off the whole thing in 2 years, so in the lease scenario there is no reason to finance the residual, you should be able to just pay it off when it is due.

Ya, I could pay off the residual for cash, just as I could pay cash for the car to begin with, but that would not be a fair "apples to apples" comparison in this scenario. I really need to add this cost to be consistent, since in the "buy" scenario the car is financed 100% and paid for after two years, but in the lease scenario I still owe $15,500 on it (plus sales tax) that would still need to be financed to keep things level. I would not be able to finance a used car at that low rate I am getting for the new car purchase. I would be more likely to get a 4% rate. Using the same discount of 2%, this still amounts to 2% of $15,500 + $1356 tax = $337 in finance cost on the residual. As I thought, this is very nearly a wash-- $368 - $337 = a $30 difference, which is negligible.

I really appreciate this discussion because it is forcing me to quantify these details and will help me decide in the end what to do. Since it now appears that our car won't get here until April, according to what people are reporting on their delivery dates, things could still change, as my loan commitment may no longer be viable then. On the upside, I will have a longer time to monitor the comments and impressions/experiences of the lucky new owners as they use their cars to help shape my opinions.

Thanks to everyone here for sharing,
TT

 

[wwhitney]

it boils down to what evnow says in the original "comprehensive lease/buy thread--"The key takeaway is that lease vs buy comes down to
- Extra fees you pay for leasing (Acquisition of 595 and disposition of 350)
- Difference between the 4.9% offered by Nissan and the interest rate offered by your lender."

I agree with a couple variations:

The disposition fee only applies if you return the car, not if you buy it at lease end.
If you are not financing in the purchase scenario, compare your discount rate with the 4.9% lease interest rate.
When leasing you end up paying sales tax on the acquisition fee and the lease interest. :-(

I can easily manipulate my income tax level for this year by converting IRA funds to Roth IRA and get the full credit, so that isn't an issue for me.

That's true as long as you intend to covert the requisite amount of funds anyway and converting extra won't bump you up into a higher tax bracket. If it will, the extra tax is an additional cost for the purchase side of the comparison.

First year costs
Lease: $6,886.53 [includes 12 payments, the first as part of the $2K]
Purchase: $19,132.39 [includes 11 payments]

Second year costs
Lease: $5,342.76
Purchase: $11,189.88 [after deducting $7500]

Third year costs
Lease: $5,342.76
Purchase: $1,557.49 [final payment on loan]

I would just include the residual and sales tax on the residual in the third year costs.

Using a 2% discount (or lost opportunity cost on my money), I can calculate the following now:
First year-- I lose 2% of $12,245 front-loaded payments, or $245
2nd year-- I lose 2% of $5847 on front-loaded payments, or $117
3rd year-- I actually gain $76, since the lease payments are greater than the loan payments in the 3rd year.
So the net difference up to the end of the lease period is $286, taking into account the time value of money.

This isn't quite right. If you are going to count this way, then in the 2nd year, you lose 2% of the total net front-loading so far, or $12,245 + $5,847, and in the 3rd year you lose 2% of the total net front loading at that point. Also you need to keep track of when the payments occur during the year, so for equal monthly payments you lose on average only six months of time value of the money.

I would actually need to add the time value of waiting for the $7500 credit, as you mentioned previously, but since I can reduce my withholding to start receiving this benefit monthly, that actually amounts to $82 (not $150)

Actually, by including it as a lower loan payment in year 2, you have already account for the time value of it.

Ya, I could pay off the residual for cash, just as I could pay cash for the car to begin with, but that would not be a fair "apples to apples" comparison in this scenario. I really need to add this cost to be consistent, since in the "buy" scenario the car is financed 100% and paid for after two years, but in the lease scenario I still owe $15,500 on it (plus sales tax) that would still need to be financed to keep things level.

No, that's not right. Remember you are trying to compute the penalty for the front loading of the purchase scenario. I.e. if your purchase scenario is the base scenario, then as an alternate you lease but have the money available at the same schedule as in the purchasing scenario. When the lease payment is less than the money you would have had to pay in the buying scenario, you effectively are banking that excess at 2% until you need it. So the time value of money you are calculating is the interest you would earn on that accruing money. At the end of the lease you use that banked money to pay off the residual, and it stops accruing interest, i.e. the lease scenario has caught up to the buy scenario and there is no more front-loading. You don't need to finance the residual.

So given all this, here is how to count using the numbers from Omkar's lease and a 2% discount rate:

Purchase: $2,000 down + 24 months of $1,557.50 - $7,500 after 12 months, simple total = $31,880
Lease: $2,000 down + 35 month of $445 + $16,943 residual plus tax = $34520

The simple difference is $2,640. [Note earlier in the thread it was $3,040, but the disposition fee was incorrectly included.] But as discussed this total is only realistic if your discount rate is 0%, e.g. if you keep a pile of cash under your mattress.

To compute the time value of money let's take the difference between the two payment streams, consider a virtual bank account that has those amounts added to it each month for the 36 months, and then calculate the interest it would earn. This is the benefit of the back-loading of the lease scenario or cost of the front-loading of the buy scenario.

Difference: $0 down + 11 months of $1,112 + 1 month of (-$6,388) +12 months of $1,112 + 11 months of (-$445) + 1 month of (-$16,943), simple total is -$2,650.
Year 1 start balance = $0, end balance = $12 * $1,112 = $13,344, interest using average balance is $133.
Tax credit at year end, deduct $7,500
Year 2 start balance = $5,844, end balance = $5,844 + $13,344 = $19,188, interest using average balance is $250.
Year 3 start balance = $19,188, end balance is $13848, interest using average balance is $330.

[I shifted some of the timing here by 1 month to keep it in blocks of 12 months for simplicity.] Total time value of money is $713, so the lease premium is actually about $1,900 for this comparison.

Cheers, Wayne

 

[ttweed]

I agree with a couple variations:
The disposition fee only applies if you return the car, not if you buy it at lease end.

Did you see in the other lease thread where there seems to be a new "Purchase Option Fee" (in CA anyway) of $300 now? Kaa-ching!

When leasing you end up paying sales tax on the acquisition fee and the lease interest. :-(

That just doesn't seem fair to me, but apparently that's how it works.

Remember you are trying to compute the penalty for the front loading of the purchase scenario. I.e. if your purchase scenario is the base scenario, then as an alternate you lease but have the money available at the same schedule as in the purchasing scenario. When the lease payment is less than the money you would have had to pay in the buying scenario, you effectively are banking that excess at 2% until you need it. So the time value of money you are calculating is the interest you would earn on that accruing money. At the end of the lease you use that banked money to pay off the residual, and it stops accruing interest, i.e. the lease scenario has caught up to the buy scenario and there is no more front-loading. You don't need to finance the residual.

Whew! This really is complicated. I think I see what you mean, though--you have to consider time from the beginning of the scenario, not each year separately, or the end of the lease as the start of a new time period. Wow. My brain is beginning to hurt...

So given all this, here is how to count using the numbers from Omkar's lease and a 2% discount rate:
[snipped calcs]
Total time value of money is $713, so the lease premium is actually about $1,900 for this comparison.

That is as good of a number as I will likely get out of my scenario. Thank you! Now, if it is true that they are going to make me pay $300 to buy the car at lease end, then the real number may be $2200, but at least I have a better handle on what the actual extra costs are. Leases are pretty "opaque" transactions for the uninitiated, to say the least! It isn't easy to see what your money is going for and why, or what some of the risks are. The thread about gap insurance and/or replacement value insurance had me going for awhile too, although it seems this can be purchased for a reasonable amount to protect yourself against losing the large capital reduction on the lease if you should be unlucky enough to total the car in the first few months of ownership. :shock: That may be a "hidden cost of leasing" as well, though...

Thx,
TT

 

[shawnbrig]

ttweed or anyone who knows, will Nissan let you pay the full amount of the lease up front in combination with the $7500 credit to avoid the interest? Someone had posted a template of his actual lease details and if I read it correctly, over the three year lease he would pay about $3200 in interest.

 

[evnow]

I agree with a couple variations:

The disposition fee only applies if you return the car, not if you buy it at lease end.
If you are not financing in the purchase scenario, compare your discount rate with the 4.9% lease interest rate.
When leasing you end up paying sales tax on the acquisition fee and the lease interest. :-(

The tax depends so much on the state. No sales tax for EVs in WA.

The approach I took in the comparison thread was to use NPV for both lease & buy. In that case, you just compare the cash purchase value with NPV of lease payments. Without considering tax, this is the comparison I got.

 

[wwhitney]

ttweed or anyone who knows, will Nissan let you pay the full amount of the lease up front in combination with the $7500 credit to avoid the interest? Someone had posted a template of his actual lease details and if I read it correctly, over the three year lease he would pay about $3200 in interest.

I would think you could pay down all the depreciation up front, so you wouldn't owe any interest on the depreciation, but you'll still be paying the interest on the residual value over the term of the lease. E.g. $16K residual, 4.9% interest, 3 years gives $2350 in interest.

Cheers, Wayne

 

[wwhitney]

The approach I took in the comparison thread was to use NPV for both lease & buy. In that case, you just compare the cash purchase value with NPV of lease payments.

I agree NPV is an elegant way to handle it but I thought it might be tricky to explain the details. It would be interesting if you could redo your comparison in that thread using the new information available to us from Omkar's example lease details, plus the $300 purchase option fee.

I'm still on the fence on the lease/buy decision. If the lease premium is around $2K, then it is only a win financially if you want to unload the car and the market value is below $14K (using a $16K residual value). I don't really have a forecast for the market value of the LEAF in 3 years, let alone the standard deviation of my forecast, so I find it difficult to make a rational decision.

Cheers, Wayne

 

[evnow]

I agree NPV is an elegant way to handle it but I thought it might be tricky to explain the details. It would be interesting if you could redo your comparison in that thread using the new information available to us from Omkar's example lease details, plus the $300 purchase option fee.

I'll take another look. I'll probably cleanup the sheet and post it online for anyone to change.

What is the $300 purchase option fee ? I've not seen it before ...

 

[ttweed]

What is the $300 purchase option fee ? I've not seen it before ...

I linked it in my post above--it was mentioned by user "spies" in the other lease info thread here:
http://www.mynissanleaf.com/viewtopic.php?f=23&t=1067&start=170

TT

 

[DaveinOlyWA]

with all this vague lease info which the dealer could not clear up. i used a general amortization calculator running the difference between

putting $2000 down and 10,000 down.

the numbers come up close but not exact, but guessing they will correlate close enough. i did ask my dealer to work up a sheet with $2000, $5,000 and 10,000 down though so will crunch #'s when they are available. he stated since the numbers change daily, he was uncomfortable providing any figures so i let it go

so i calculated P/I for a $26,500 loan and $18,500 loan which i am guessing would closely approximate a $2000 verses $10,000 loan and difference in interest savings is around $650.

now, this is not exact and did it on a 7 year term trying to hit my 44% target on balance after 3 years and these #'s come close at around $14,700 when my residual should be around $15,000 or so.

thurs, i will be calling my insurance company to discuss pay off scenarios with them in case of an accident (heaven forbid!!) then will decide because its looking like a larger down payment on the lease seems to really have minimal negative repercussions and lowers my monthly payments.

to be honest with ya, last time i made payments on a car was back in the early 80's. hate paying interest, so if i can reduce that, i will


the flip side has me buying the car outright and paying the extra to carry the tax credit for over a year before i get that which is essentially allowing Uncle Sam to benefit because they collect interest on my tax credit until they pay it out and my interest liability is higher in the interim. in any loan, the first year the interest is very high and i would be paying the max interest until i got the tax credit and could afford a balloon payment to reduce the interest.

another reason, if the car should be totaled and i had bought it, the insurance company would pay the book value on it. i would get money back because the tax credit still comes to me but again would not get it until Feb 2012 or so at the earliest.

if i lease, the insurance company (i think, which is what i will verify on thurs) will pay off value to leasing company which would be book value minus the full tax credit (which would not qualify for ) and i would get the balance right away. which would be good because i would be without a car and needing one right away.

 

[evnow]

What is the $300 purchase option fee ? I've not seen it before ...

I linked it in my post above--it was mentioned by user "spies" in the other lease info thread here:
http://www.mynissanleaf.com/viewtopic.php?f=23&t=1067&start=170

TT

Interesting. That might be a CA thing. Need to do some web searching on that ...

 

[ttweed]

Interesting. That might be a CA thing. Need to do some web searching on that ...

Omkar is in CA and I don't remember him mentioning anything about it when he posted about his lease. Maybe he's not planning on keeping it, though, so it was immaterial to him? Maybe it's up to the dealer? The excerpt of the contract that spies posted shows a "fill-in-the-blanks" area for the fee as well as the residual:

TT

 

[tbleakne]

That will be right after the question about how the hell they are going to assure me about the battery capacity over time if there is nothing in the warranty to indicate what a "normal" rate of loss should be?

TT

It is clear that Carwings will be reporting to Nissan a continuous record of not just the battery's status, but how aggressively it is used (how many QCs, how many times you reached 'Turtle Mode', etc. So at the end of your lease they could pull up all kinds of evidence to justify any claim they might make that the battery has been subjected to more than "normal use." Has anyone found any wording in the lease agreements referring to possible extra changes at the end of lease to cover excessive battery usage ?

 

[DaveinOlyWA]

nothing on battery. just mostly physical appearances. like it would cost Nissan a lot of money?

any lease turned back in would have a brand new battery pack dropped in and sold for $20,000 easy. how else do you expect to get real market penetration for EVs

 

[EVDRIVER]

nothing on battery. just mostly physical appearances. like it would cost Nissan a lot of money?

any lease turned back in would have a brand new battery pack dropped in and sold for $20,000 easy. how else do you expect to get real market penetration for EVs

How did you come up with that figure? What do you think the replacement cost of a pack is with shipping, labor, etc?

 

[DaveinOlyWA]

purely a guess. lightly used lease vehicles will probably go for $24-25,000.

i b willing to bet u, Nissan can replace the batteries for less than $3,000 out of pocket on an exchange in 3 years.

 

[EVDRIVER]

purely a guess. lightly used lease vehicles will probably go for $24-25,000.

i b willing to bet u, Nissan can replace the batteries for less than $3,000 out of pocket on an exchange in 3 years.

I b willing to bet you are far off on pack cost, even if it cost Nissan $3K that is not dealer cost and if it were without labor that would mean about $4500 for a new pack retail to buy, I don't see that. Consider the retail price of an L1 cord form parts at about $640 and the relative cost to build that device.



What do you think the labor and shipping alone would be? If I buy I pay about 25K after all taxes and rebates, and you think that will be the lease or private party in three years. Is that assuming rebates available at the time?

 

[Googler]

The figure quoted in 2010 for cost of the Leaf batteries was $375/kwh. For a 24kwh pack, that's $9000 for manufacturing cost. A more recent guess was $310/kwh. Deloitte has observed that the historical rate of improvement in battery technology has been something like 5%. Another report from Citibank in 2009 said something similar (see http://ourenergypolicy.org/docs/9/All_Hail_the_Electric_Car_-_Citi__3_.pdf). If you forecast a rapid 20% rate of price drop for the next three years, it would still have a manufacturing cost of $4600 after three years. The retail cost including installation for a new battery pack would be considerable.

Consider that the car retails for $33K at present. A prius, civic, and VW Jetta TDI all sell for under $25K. A huge part of the cost for the Leaf is the batteries. I wouldn't count on batteries being cheap in three years.